What is a Franchise?

Definition: A franchise is the license to make or sell a product under certain conditions granted by the owner of these rights. In other words, a franchise is the right to produce a licensed product by the owner of the license. In this contact, the franchisee pays the franchiser for the right to use the licensed material.

Example

We often think of restaurants like McDonalds, Subway, and Burger King when we hear the term franchise, but these companies aren’t actually franchises themselves. The way it works is the McDonalds Corporation owns the licensing rights to its product names, processes, and distribution network. No other company can call its sandwich the Big Mac without permission from McDonalds. That is where the concept of franchises comes into play.

In an effort to grow their global business McDonalds found out it would be too costly to actually build buildings and run thousands of restaurants. Instead, they decided to sell the rights to use the name McDonalds along with the products and processes. This way the corporation doesn’t have to invest in new fixed assets, but it can make a profit while expanding the reach of its brand.

A franchise McDonalds store is typically privately owned and must pay the greater corporation an amount each year to maintain its franchise. It must also adhere to specific production and quality requirements. Have you ever wondered why every McDonalds franchise is exactly the same? Well, that’s because each franchise is required to make their burgers, shakes, and fries exactly how the corporation tells them to.

What Does Franchise Mean?

We know what McDonalds Corp gets out of this contract, but what do the franchisees get? Well, they get a businessplan and access to an already established market. Starting a new McDonalds isn’t like starting a new Mom and Pop restaurant. It already has an established customer base. That is exactly what the franchisee is paying for.